SGR: What Went Wrong?

by David Pittman David Pittman,Washington Correspondent, MedPage Today
January 29, 2014

WASHINGTON -- SGR has become a four-letter word in Washington.

Medicare's sustainable growth rate (SGR) payment formula has long been an annual nightmare for policymakers and physicians. Created in 1997 as one of numerous changes to Medicare under the Balanced Budget Act, it was a way to restrain the government's spending on Medicare. If Medicare Part B expenditures exceeded a target tied to overall economic growth, the physician fee schedule would be cut the following year. If spending fell below the target, physician payments would be increased.

Although cuts to the physician fee schedule were called for under the formula every year after the first few years, the cuts have taken effect only once -- in 2002, when the SGR called for a 5.4% cut.

Instead, the SGR has been better at threatening physicians with dramatic cuts to the fee schedule than at actually holding down costs. Since 2003, Congress has acted 15 times to prevent Medicare pay cuts to doctors, costing a total of $150 billion. The almost annual threat of cuts, followed by a last-minute reprieve from Washington, has been a pain for providers and Congress.

A Failure in the Making

But the SGR was almost certain to fail, according to those who were in positions of power at the time, because the formula that helps determine physician pay levels under Medicare had many shortcomings.

"I pleaded with members of Congress not to have an SGR [tied to] the growth of the economy because there is no historical precedent to suggest that was sustainable," Gail Wilensky, PhD, chair of the Physician Payment Review Commission (PPRC) from 1995-1997, told MedPage Today. The PPRC later became the Medicare Payment Advisory Commission (MedPAC), which advises Congress on Medicare pay strategies.

With an economy humming in the mid-to-late 1990s, few projected any SGR cuts to take effect right away. SGR critics, though, were afraid of what would happen when the economy slowed and Medicare growth would easily eclipse it, triggering pay cuts to doctors.

"It was clear at some point [the economy] would turn around, and giving larger-than-otherwise-expected fee increases -- which was what was happening in 1997 and 1998 -- would turn around to bite them as soon as the economy slowed down, which, of course, it did around 2002," Wilensky, now a senior fellow at Project HOPE, said at a recent Alliance for Health Reform event on the SGR.

Congress is finally on the verge of repealing the SGR, after failing for many years to do away with the law.

The 1992 formula -- called the Medicare Volume Performance Standard -- was largely unsuccessful at reining in costs, since the volume of services kept increasing. Health economists feared that trying to place too much restraint on volume would cause prices to inflate, according to Bruce Vladeck, PhD, who headed the agency that ran Medicare -- known at the time as the Health Care Financing Administration from 1993 to 1997.

Policymakers then turned to the SGR, which instead placed a cap on overall physician payments.

That move, too, has been ineffective at reigning in volume, Jim Capretta, then a staffer at the Senate Budget Committee, told MedPage Today.

"In the types of specialties where volume can be changed based on production, they just started cranking up the volume," Capretta, now a visiting fellow studying health policy at the American Enterprise Institute here, said in a phone interview. "That's been a feature of the system pretty much ever since it was enacted."

Furthermore, since the SGR was based on overall physician spending, there was no incentive for individual doctors to perform well and be more efficient. No one provider or group could affect overall Medicare payments, which totaled $70 billion to physicians in 2012.

Vladeck, like many others, said he believes there's too much emphasis on procedures and that more money should be spent on primary care evaluation and management codes.

"Focusing solely on physician fees represents a reinforcement of the various silos in the healthcare system that we keep saying we're trying to move away from," Vladeck told MedPage Today in a phone interview.

" 'When you say things we want to hear, we like you. And when you say things we don't want to hear, we don't like you,' " Wilensky recalled him saying. "So I guess I laughed and said 'OK. We're going to keep saying the things we ought to be saying.' "

Thomas did not return a request for comment from MedPage Today.

The SGR was something Congress had pushed for. Staffers at the House Ways and Means Committee wanted some sort of link between Medicare spending and the growth of the overall economy, since healthcare spending was far outpacing overall economic growth.

In addition, congressional accountants estimated the SGR would save the country a lot of money as part of a bill that sought to balance the budget in a few years.

"We weren't that worried about, in the short term, what was happening with physician payments as compared to what was happening with a number of the Part A [hospital] outlays," he said. "It was never seen as a priority issue by the administration during that time."

"If I were to do it all over again, I would have argued for something that was less [formulaic] or automatic in whatever the policy was," Vladeck said.

For example, if Part B spending saw an increase in outpatient services, but spending for more expensive inpatient services fell, that was good and shouldn't be stopped, Vladeck said. "I think that was pretty much what we argued back then, but we weren't going to fall on our swords on that issue."

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